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Better Fintech Stock: Robinhood Markets vs. PayPal

By Leo Sun – Dec 30, 2021 at 9:28AM

Key Points

  • Robinhood disrupted the brokerage market with free trades, but its business model is very wobbly.
  • PayPal’s digital payment business is more stable, but it set some very lofty goals for 2025.
  • One of these fintech stocks is clearly a safer investment.

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Is the disruptive brokerage a better play than the digital payments leader?

Robinhood Markets (HOOD 2.64%) and PayPal Holdings (PYPL 2.08%) represent two very different ways to invest in the growing fintech market.

Robinhood is the disruptive online brokerage that popularized commission-free stock and cryptocurrency trades. Its streamlined smartphone app and gamified user interface also made it a popular choice for younger investors.

PayPal is one of the largest online payment platforms in the world. It also provides "buy now, pay later" (BNPL) services, peer-to-peer payments through its Venmo app, cryptocurrency purchases, and other services.

A shopper makes a payment with a smartphone.

Image source: Getty Images.

Investors treated these two stocks very differently after their public debuts. Robinhood went public in July 2021 at $38 per share, but it now trades roughly 50% below its IPO price. Meanwhile, PayPal's stock price has rallied more than 400% since it was spun off from eBay (EBAY 1.05%) in July 2015.

Will PayPal's scale and stability make it a better fintech investment for 2022? Or will Robinhood recover and outperform its larger industry peer?

Why did investors abandon Robinhood?

Robinhood's stock tumbled as investors fretted over its decelerating growth, its steep losses, and its looming regulatory challenges.

Robinhood's revenue surged 245% in 2020 as more retail investors loaded up on meme stocks and cryptocurrencies throughout the pandemic. But for 2021, it expects its revenue to grow by about 88%.

That's still an impressive growth rate, but Robinhood's number of monthly active users (MAUs), funded accounts, assets under custody (AUC), and average revenue per user (ARPU) all declined sequentially last quarter.

Robinhood blamed that slowdown on the market's waning interest in Dogecoin (DOGE 8.32%), which accounted for 40% of its cryptocurrency transaction-based revenue during the quarter. Competition from other free trading platforms also likely exacerbated that slowdown.

After squeezing out a slim profit in 2020, Robinhood racked up steep losses throughout the first nine months of 2021. Those losses can be attributed to an offering of convertible notes it issued to stay solvent during the Reddit-fueled short squeeze in early 2021, as well as massive stock-based compensation expenses for its top executives and insiders.

Robinhood still served 18.9 million MAUs last quarter, but its average account size was only about $3,500. Schwab (SCHW -0.17%), which served 32.9 million active brokerage accounts in its latest quarter, has an average account size of about $240,000. Therefore, Robinhood might have plenty of users, but its platform is still dwarfed by the traditional brokerages.

Meanwhile, U.S. regulators have been scrutinizing the payment for order flow (PFOF) model that subsidizes Robinhood's commission-free trades. PFOF trades are already banned in several countries, and a ban in the U.S. would inevitably force Robinhood to start charging commissions.

Analysts expect Robinhood's revenue to rise 91% in 2021, but decelerate to just 22% growth in 2022 as it remains deeply unprofitable. On the bright side, its stock trades at less than seven times next year's sales -- so its downside potential could be limited at these levels.

But PayPal also generated dismal returns in 2021

PayPal's growth since its split from eBay has been impressive, but the stock still shed nearly 20% of its value over the past 12 months.

Investors turned against PayPal after it posted two mixed earnings reports with soft guidance. PayPal's revenue rose 21% in 2020, while its adjusted earnings grew 31%. But for 2021, it expects its revenue and adjusted earnings to grow roughly 18% and 19%, respectively.

That deceleration, while mild, raises concerns about PayPal's ability to hit the ambitious growth targets it set at its investor day in early 2021. Specifically, PayPal believes it can more than double its annual revenue, from $21.45 billion in 2020 to over $50 billion in 2025, while increasing its earnings per share at a compound annual growth rate (CAGR) of 22%. It also said it would increase its number of active accounts to 750 million -- representing a whopping 80% jump from its 416 million active accounts in its latest quarter.

PayPal's rumored interest in buying Pinterest (PINS 3.53%), which it subsequently denied, also suggests it might rely on costly acquisitions to hit its 2025 targets. That strategy would squeeze its operating margins, which already declined both sequentially and year over year last quarter.

Nonetheless, PayPal insists the growth of its new "super app" for various financial services, the rising acceptance of mobile payments globally, and Venmo's expansion into new markets -- such as its partnership with Amazon -- will help it hit those long-term targets.

Analysts expect PayPal's revenue and earnings to grow 18% and 14%, respectively, in 2022. Those estimates indicate PayPal's growth rates should remain stable, and its stock still looks reasonably valued at 35 times forward earnings and seven times next year's sales.

The obvious winner: PayPal

PayPal isn't a perfect fintech stock. It might have set the bar a bit too high for 2025, its rumored interest in Pinterest raises red flags, and it faces plenty of competition from other innovative fintech players like Block and Adyen.

However, it's definitely a better investment than Robinhood, for five simple reasons: Its growth is more stable, it's consistently profitable, it has a larger and more geographically diversified base of users, it doesn't rely on speculative cryptocurrencies, and it doesn't face any meaningful regulatory headwinds.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns Amazon, Block, Inc., PayPal Holdings, and Pinterest. The Motley Fool owns and recommends Adyen N.V., Amazon, Block, Inc., PayPal Holdings, and Pinterest. The Motley Fool recommends Adyen, Charles Schwab, and eBay and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, short January 2022 $1,940 calls on Amazon, and short January 2022 $82.50 calls on eBay. The Motley Fool has a disclosure policy.

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